Archived entries for Financial

We last looked at Facebook’s payments business in Q1 2013, where we observed a slight increase in payments revenue. Payments in the second and third quarters remained relatively flat across regions, reflecting seasonality. Facebook’s payments revenue in Q4 appears to be down 6% year-over-year; however, this is due to last year’s deferred revenue recognition. Despite the expected seasonal increase in Q4, payments growth actually saw approximately 27% growth over the year ago quarter.

Facebook’s payments business earned $241 million in the quarter, making up a modest 9.3% of its total $2.58 billion in revenue in the quarter. The lion’s share accrued to North America with $138 million, an approximately 6% increase over Q4 2012. Facebook’s largest year-over-year increase occurred in Europe, where revenue increased by 21%, from $56 million to $69 million. Payments revenue in Asia and rest of world regions remain relatively unchanged year-over-year.1

According to the company, after adjusting for a deferred revenue recognition, payments revenue from games grew 8% over the year ago quarter. Facebook noted that games revenue, which comprises the majority of its payments business, is limited to its desktop user base. And, that the desktop segment of its user base is declining. Facebook’s tacit admission that, despite games revenue growth, its payments business effectively monetizes an increasingly less important segment of its user base is telling.2

In the second quarter Facebook continued its trend of growing mobile ad revenue to a larger share of its total advertising revenue. Although this result is in line with our conclusions based on Facebook’s performance in the first quarter, the significant beat on estimates has resulted in the stock price rising to pre-IPO levels. In order to understand how Facebook has continued to grow mobile ad revenue, we need to reassess its advertising business.

We determined that in the first quarter increases in advertisements delivered and price paid per ad resulted primarily from News Feed ads on Facebook’s desktop product, and to a lesser extent on its mobile products. We also observed increases in user engagement in the quarter. Finally, Facebook’s decision to lower the market reserve price increased market supply for ads on the network essentially by reducing the input costs for advertisers.

Revenue in the second quarter remains highest in North America and Europe; however, the growth in Facebook’s emerging market regions continues to outpace the established markets. The North America region saw $721 million in revenue, an increase of 51% over the year ago quarter. Europe region’s revenue grew from $294 to $479 million, a 53% year-over-year increase. In Asia and rest of world revenue essentially doubled over the year ago quarter.1

We previously examined the composition of Facebook’s fixed assets. We visualized the historical costs of Facebook’s property and equipment, and we looked at the depreciation rates on its line items, and its accumulated depreciation in order to derive the net value of Facebook’s fixed assets. We are now in a position to assess Facebook’s capital expenditure (capex) for property and equipment.

Facebook’s reported capex is split between purchased property and equipment, and property and equipment acquired under capital lease. In its filings Facebook also tells us that it occasionally purchases property and equipment for which it obtains capital financing under sale-leaseback transactions. These leases are typically for three years, except for 15 year building leases, and other long term agreements.1

We can visualize Facebook’s yearly purchases and leases of property and equipment since 2007. Purchased and leased capital grew by 788% and 288%, respectively, from 2009 to 2010. Spending by Facebook on fixed assets grew at similar rates between 2010 and 2011. Although leased capital spending declined in 2012 capital spending still grew by as much as 103% over the previous year.

By examining Facebook’s income statement and balance sheet, we can better understand the company’s fixed assets. We can observe the sequential growth in the historical cost of property and equipment line items. We can also take a closer look at the depreciation rate for property and equipment, in order to derive a net value for Facebook’s fixed assets. In a later article we will examine capital expenditure (capex) for new property and equipment.1

Before we analyze Facebook’s capex, it is instructive to assess the composition and value of Facebook’s currently held property and equipment. In Q1 2013, the combined historical costs of Facebook’s fixed assets were $3.53 billion, an increase of 47.7% over the year ago quarter.2 The largest component of Facebook’s property and equipment is network equipment. In the first quarter the historical cost of Facebook’s network equipment passed $2 billion.3

Facebook’s filings also reveal the depreciation rate for its fixed assets. For its network equipment, Facebook estimates that the useful life of its purchases and leases will be three to four years. Buildings will fully depreciate after 15 to 20 years. Computer software and office equipment will last two to five years. Leased equipment and leasehold improvements depreciate at a rate lesser to the useful life or remaining lease term. Land and construction in progress does not depreciate.

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Continuance, a Facebook analysis blog, explores operational and financial indicators to evaluate Facebook and its stock performance, and evaluates trends in social networking and mobile communications.